Why did reported operating income grow so much faster than revenue in 2002?

Operating income increased $258 million (160%) to $419 million, but this comparison is affected by the $80 million non-cash performance-option charge in 2002 versus $158 million in 2001. Excluding that charge and net gains on disposals, operating income rose $184 million (61%) to $486 million, and the filing notes that $34 million of this increase came from changing how goodwill and intangible assets are amortized.

What drove the growth in revenues?

Management estimates that 55% of the revenue increase came from net new business growth and 45% from higher premium rates in the market. Commissions and fees increased $304 million (22%) to $1,661 million, and interest income rose $7 million to $74 million. Revenue growth was also supported by acquisitions and favorable currency effects, which together accounted for about 4% of the total increase.

How much financial risk does the Gras Savoye put arrangement pose?

The put arrangement allows other Gras Savoye shareholders to sell their shares to Willis through 2011, potentially increasing Willis's ownership from 33% to 90%. The incremental 57% may be put to Willis until 2005 at the greater of approximately $128 million or a formula-based price, which at December 31, 2002 would have amounted to approximately $197 million. Management believes sufficient funds would be available to satisfy the obligation if the shares were put, although the amounts may significantly exceed these estimates.

Is the company still a foreign private issuer, and how does it report now?

As of December 31, 2002, a majority of the shares were held for the first time by US residents, so the company ceased to be a foreign private issuer for US reporting purposes. It stopped filing Form 20-F and Form 6-K and now files Form 10-K and Form 10-Q reports. Its wholly owned subsidiary, Willis Group Limited, continues to file Form 20-F and Form 6-K because it has publicly registered debt outstanding.

WTW 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 26, 2003. Cited figures are marked; the original filing is the authoritative source.

Willis Group Holdings Limited (now Willis Towers Watson), one of the largest insurance brokers in the world, filed this Form 10-K for fiscal 2002.

The company reports total revenues of $1,735 million^a in 2002, up 22% from $1,424 million in 2001, and net income of $210 million ($1.28 per diluted share), compared with $2 million in 2001. Operating income rose to $419 million from $161 million, though it includes an $80 million non-cash charge for performance-based stock options. Excluding that charge and the net gain on disposals, operating income increased 61% to $486 million, and operating cash earnings per diluted share were $1.62, up 64% from 2001.

Management attributes about 55% of the revenue increase to net new business and 45% to higher premium rates. The company's balance sheet strengthened over the year. Total long-term debt fell 28% to $567 million, stockholders' equity rose to $854 million^b, and cash and cash equivalents reached $211 million.

Management also disclosed the initial quarterly dividend of $0.125^c per share, declared in February 2003, and the company expanded its ownership of Willis GmbH to 100% in January 2003. The filing flags material risks, including the cyclical nature of premium rates, errors and omissions claims, a put arrangement for Gras Savoye shares that could require substantial payments through 2011, and legal exposure tied to the Sovereign/WFUM run-off, UK pension reviews, World Trade Center placements and a personal accident reinsurance dispute.

The filing states that the company ceased to be a foreign private issuer as of December 31, 2002, after a majority of its shares came to be held by US residents, and that it now files Form 10-K and 10-Q reports. Its shares trade on the New York Stock Exchange under the symbol WSH.

02—Key points

Key Highlights

Total revenues rose 22% to $1,735 million in 2002 from $1,424 million in 2001, with underlying growth of 18% after adjusting for currency and acquisitions.
Net income was $210 million ($1.28 per diluted share) in 2002, versus $2 million in 2001, and operating income reached $419 million versus $161 million.
Operating cash earnings per diluted share were $1.62 in 2002, an increase of 64% over 2001, and net cash provided by operations rose to $343 million from $221 million.
Long-term debt fell 28% to $567 million at year-end 2002, and total stockholders' equity increased to $854 million.
The company declared an initial quarterly dividend of $0.125 per share, with an annual cost of approximately $74 million, first payable April 15, 2003.
A put arrangement for Gras Savoye shares, exercisable through 2011, could raise Willis's ownership from 33% to 90% and require substantial payments, with the portion put until 2005 priced at a minimum of $128 million or a formula value of approximately $197 million.
The filing identifies several significant legal matters, including Sovereign/WFUM run-off, UK pension review claims with a remaining provision of $23 million, World Trade Center placement litigation, and personal accident reinsurance disputes.

03—Questions

Frequently Asked Questions

Why did reported operating income grow so much faster than revenue in 2002?
Operating income increased $258 million (160%) to $419 million, but this comparison is affected by the $80 million non-cash performance-option charge in 2002 versus $158 million in 2001. Excluding that charge and net gains on disposals, operating income rose $184 million (61%) to $486 million, and the filing notes that $34 million of this increase came from changing how goodwill and intangible assets are amortized.
What drove the growth in revenues?
Management estimates that 55% of the revenue increase came from net new business growth and 45% from higher premium rates in the market. Commissions and fees increased $304 million (22%) to $1,661 million, and interest income rose $7 million to $74 million. Revenue growth was also supported by acquisitions and favorable currency effects, which together accounted for about 4% of the total increase.
How much financial risk does the Gras Savoye put arrangement pose?
The put arrangement allows other Gras Savoye shareholders to sell their shares to Willis through 2011, potentially increasing Willis's ownership from 33% to 90%. The incremental 57% may be put to Willis until 2005 at the greater of approximately $128 million or a formula-based price, which at December 31, 2002 would have amounted to approximately $197 million. Management believes sufficient funds would be available to satisfy the obligation if the shares were put, although the amounts may significantly exceed these estimates.
Is the company still a foreign private issuer, and how does it report now?
As of December 31, 2002, a majority of the shares were held for the first time by US residents, so the company ceased to be a foreign private issuer for US reporting purposes. It stopped filing Form 20-F and Form 6-K and now files Form 10-K and Form 10-Q reports. Its wholly owned subsidiary, Willis Group Limited, continues to file Form 20-F and Form 6-K because it has publicly registered debt outstanding.

04—Continue

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